Microeconomics Chapter 1

Scarcity

  • All resources are limited, some more than other - have to manage these while fulfilling as many economic wants
  • Examples:
    • Having to add a minimal amount of armor to fighter jets so they don’t get shot down.
    • Increasing minimum wage pays some people more, but also forces businesses to hire less people
  • Economists must see possible consequences - can’t just analyze what is there, have to predict what is not
  • Scarcity - limited resources, unlimited economic wants
  • Capital goods vs. consumer goods
    • Capital goods: government spending, more money spent on capital goods -→ future economic growth
    • Consumer goods: providing resources to people - helpful to people in short term, but doesn’t encourage long term growth
  • Resources: Land, Labor, Capital, and Entrepreneurial ability
  • Economics focuses on how to deal with scarcity - macroeconomics deals with entire economy, micro deals with specific markets
    • Cannot do economic experiments, way too many variables in the environment; Make assumptions to explain some things

Production Possibilities Curve

  • PPC - Used to see the maximum amount of products that can be created with scarce resources

 

  • Anything on the line is and efficient use of resources - Inside is inefficient, outside is not attainable
    • Model makes assumptions as mentioned before - full employment, fixed resources, fixed technology
  • Opportunity Cost - Basically the cost of choosing one option over another
    • Example: If you make 10 dollars in a day and decide to go on vacation for 4 days, the opportunity cost is 40 dollars
    • Example: Opportunity cost per unit of wood is 5 units of food/20 units of wood: 1/4 unit of food per unit of wood
    • Minimal opportunity cost = maximum utility
    • Opportunity cost per unit = give up/get
    • Opportunity cost of food = reciprocal of opportunity cost of wood: 4 units of wood per unit of food
  • Marginal Analysis - Analyzing benefits vs. costs of economic decisions
    • MR = MC (Marginal Revenue >= Marginal Cost; Otherwise, Opportunity cost is too high)
  • Graph shows constant opportunity cost - As you make more wood, you are losing a fixed amount of food, and vice versa

 

  • This graph shows increasing opportunity cost: Basically, as you give up more resources for making one thing to make another thing, those resources are less suited to make the new thing, so the opportunity cost is higher
  • Economic Growth = growing the curve so it reaches farther out;
    • More resources, or improved resources
    • Better Education
    • Better technology
    • Also possible with international trade
  • Some pitfalls in Economics:
    • Bias - “First rule of economics → scarcity, first rule of politics → forget rule one of economics.”